HMRC might have been incorrectly applying their own employment legislation. A HMRC contractor has successfully claimed for £4,200 of unpaid holiday pay after being forced to work through an employment agency rather than as a direct HMRC agency employee. She claimed that her employment violated the IR35 rules for public sector engagements that came into being in 2017.

IR35, first introduced by HMRC in 1999, is tax legislation designed to prevent companies disguising their employees as contractors or consultants to avoid paying National Insurance and income tax.

The revised rules mean that public sector organisations are responsible for deciding whether limited company contractors should be taxed as permanent employees (inside IR35) or as off-payroll staff (outside IR35).

Marketing consultant Susan Winchester was employed through her marketing company, SJW Marketing Solutions, to provide services to the department in September 2016. When the new IR35 rules came into effect in April 2017, HMRC decided that Winchester would need to come onto the company’s agency payroll.

This meant she saw herself subject to large deductions, including national insurance and the apprenticeship levy, without being offered proper workers’ entitlements such as holiday. Under IR35, she was effectively considered to be an external company ‘working’ for HMRC, but not a full HMRC agency ‘employee’. Confusing, right?

It seems that HMRC thought that by contracting her as a one band marketing company, they could scrimp on their holiday pay while still applying their new tax rules.

HMRC didn’t give her any option to appeal this decision at the time. It wasn’t until over a year later that Susan Winchester managed to recover her unpaid holiday leave which the parties involved settled out of court on the morning of the trial.

A potential motive for HMRC to settle out of court could have been so that no legal precedent from the case would exist.

HMRC’s actions have come across as slightly hypocritical before.

In October 2017, HMRC signed a deal with Amazon to provide their online cloud services. Before then, HMRC used Salford-based cloud services provider DataCentred. After they lost their HMRC contract, the firm went into administration – the contract having previously provided 85% of DataCentred’s revenue.

This is especially alarming when you consider that British government has previously given a lot of ‘tough talk’ about the tax avoidance practices of the US tech giant who recently became the world’s second trillion dollar company. Providing them with more ‘untaxable’ revenue doesn’t seem like the most logical solution for the government’s tax collection department to take.

What’s more, their conduct also broke from a government pledge to award contracts to small and medium-sized British businesses.

This isn’t the first bit of controversy around the 2017 IR35 reforms. When the reforms were introduced, HMRC were accused of suppressing stakeholder views through editing the released notes from a meeting with stakeholders from the IT industry and then publishing them without permission.

Many in the IT industry accused HMRC of rewriting the facts to suit their side of the story. Tax advisory service ContractorCalculator, Computer Weekly and the IPSE cited the new IR35 rules as the reason for public sector IT contractors walking out of their jobs – HMRC’s version of events neglected this.

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